Dell's new goal: Double in size

update The PC maker plans to remake itself into a bigger, fiercer competitor by selling servers and high-end services to businesses, and by moving into new consumer PC markets around the world.

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
5 min read
update Dell Computer wants to be twice the company it is now.

The PC maker plans to remake itself into a bigger, fiercer competitor by selling servers and high-end services to businesses, and by moving into new consumer PC markets around the world. The goal: a twofold increase in revenues.

As the market for computer equipment returns to health, Dell plans to add to its employee roster, beefing up in new areas such as professional services, senior executives told attendees at the company's annual financial analyst meeting in New York. The company will continue to expand into product areas such as servers, networking and storage while it sustains its PC business.

"Our target now is to double the size of the company again in the next few years," said Kevin Rollins, Dell's president and chief operating officer.

One area where it will likely grow is services, which now represent about 10 percent of Dell's revenue. The company is working to expand the offerings of its services arm, Dell Technology Consulting, in a variety of ways, including partnerships, organic growth and acquisitions focused on Microsoft and Linux software.

Dell has also redoubled its efforts to sell computers to large corporations. Part of its newest corporate bid is a trio of new servers, announced Wednesday, that includes Dell's first blade server.

All the while, Dell plans to hold onto its role as the pied piper of the PC market by continuing to lead customers away from its competitors. A new element under consideration would be expansion into new consumer PC markets outside the United States.

Traditionally, Dell has stayed away from the sub-$1,000 retail PC fray. But during 2001, it expanded its efforts in the U.S. consumer market after making what it called "major breakthroughs" in solving the economics of the market. Those breakthroughs included lowering prices and developing computer bundles--including financing, Internet access and peripherals--that added $250 to $300 to each sale.

"We'll be looking...at the appropriate time to launch that strategy in other parts of the world," Rollins said.

Broadening its horizons
Dell is already working to expand its presence in France, Germany, Japan and China, where it has mainly targeted the business PC markets. But the Smart Step PC, the cheap, fixed-configuration PC for the consumer market, was actually first released in China in July 2001 before coming to the United States.

The company will also look to grow by moving into the PC peripherals market with its own Dell-branded products. For example, it will begin shipping a new portable projector this summer, and it is considering ways to get into the market for printers.

But Dell won't go unchallenged in either of its new target markets. It will run up against IBM's Global Services division and the services organization of the combined Hewlett-Packard and Compaq Computer--assuming those companies' merger is approved--when bidding on large corporate contracts.

It also faces renewed competition on the consumer side from Gateway, which recently slashed the prices of its PCs in an effort to win back its market share.

Dell founder Michael Dell says Gateway's recent price reductions will just force Dell to work harder.

"We will not back off...on price," he said.

Instead, the company will focus on reducing its costs to maintain its profitability. Dell continues to cut costs by tweaking its manufacturing processes and supply chain and by reducing warranty costs, senior Dell executives said.

Optimism for the first quarter
Ahead of the meeting in New York, where it is giving updates on its business progress and providing goals for its fiscal 2003, Dell offered fairly upbeat guidance for the current quarter. The company said late Wednesday that it expects sales to be slightly better than expected in its first fiscal quarter, although its profit forecast remains unchanged.

Chief Financial Officer James M. Schneider opened the meeting saying that Dell is seeing renewed strength across the board in the U.S. PC market.

"We had already assumed we'd do better than our competitors and take some (market) share," Schneider said. And with four weeks to go in the quarter, sales have been better than the company's earlier expectations.

"We're seeing most of that upside in the U.S.," he said, though not in any one area. The improvements have come in all of the company's business units, offsetting any seasonal first-quarter declines the company might normally see in its consumer PC business.

The Round Rock, Texas-based PC maker said revenue will likely come to around $7.9 billion for the quarter, which concludes at the end of April. While that's 2 percent lower than last quarter, the company earlier said revenue could drop 3 percent to 5 percent given the usual seasonal slowdown.

Dell said it still expects to earn 16 cents per share for the period, however.

Analysts saw the news as positive, given that Dell expects its revenue decline from the fourth quarter to be smaller than previously thought.

"We believe that this positive sales preannouncement demonstrates that Dell continues to execute flawlessly in a tough environment," Steven Fortuna, an analyst with Merrill Lynch, said in a report Thursday morning.

Component costs cooperating
On Wednesday, Rollins said in a statement that component costs, which had been rising since late last year, have begun to flatten out. As a result of the shift in pricing, Rollins hinted, Dell could once again begin to lower computer prices.

Lower DRAM (dynamic RAM) costs helped Dell achieve a good part of its cost advantage over competitors. However, Rollins said, "we're pretty comfortable that we can maintain that cost advantage through initiatives we've leveraged throughout the company."

In recent weeks, manufacturers such as Apple Computer and NEC have raised prices as a result of price increases in memory and flat panels. Dell has reduced the amount of memory in certain computers and has even taken some models off the market, replacing them with more expensive PCs to blunt the effect of the price increases.

A respite in component-price increases, though, would give the company the opportunity to again apply pressure to the rest of the market by squeezing even more costs from its manufacturing systems. Since late 2000, Dell has relentlessly worked to lower its manufacturing costs, and ultimately PC prices, in an effort to take market share.

Overall, the effort has succeeded, according to most analysts.

"Component costs fell at an unprecedented rate last year, and we gained significant new business from passing those declines to customers more rapidly than anyone," Rollins said in a statement.

"Supply costs have flattened somewhat, but our competitive advantage has not. The total opportunity to lower costs--in areas such as product design, warranty expenses, manufacturing and call-center management--is even greater this year than last," Rollins said.

News.com's Michael Kanellos contributed to this report.